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Winners & Losers 2010: The slacker – Microsoft

The Windows maker once led the pack. Now, it barely keeps up at all.

&#9660 Earlier this year, when Microsoft killed its new line of Kin smartphones in less than two months, its own employees were among the first to admit the Redmond, Wash.-based company had screwed up. “Embarrassment all over campus from the rank and file about the Kin announcement,” wrote one Microsoftie in an e-mail to Silicon Alley Insider, a popular tech blog. “No one thought it was a great product to launch anyway.”

As the employee’s frustration suggests, the Kin wasn’t a one-off flop. In recent years, Microsoft has consistently struck out with consumers, trailing behind competitors with lacklustre products. At the root of these failures, say observers, is a combination of complacency, a lack of new ideas and tired leadership — serious weaknesses that have begun to take a significant toll. In the past year, Microsoft’s shares dipped by 20%. Meanwhile, Apple re-placed Microsoft as the world’s most valuable tech company, and prominent Wall Street firm Goldman Sachs raised doubts about investing in the company’s stock, downgrading its rating from Buy to Neutral. All of which indicates that the planet’s largest software company is looking remarkably old-fashioned for a firm that trades in the future. As Sasa Zorovic, senior analyst for Janney Montgomery Scott, puts it, “They have phenomenal horse and buggy stuff, but we’re in a world where cars are taking off.”

Microsoft appears to be experiencing the ill effects of getting too comfortable. After all, Windows currently makes up 94% of the PC market, allowing it to sit back and watch revenues, which totalled $58 billion in 2009, roll in. As a result, the once cutting-edge company has become a perennial late-comer. Starting with the rise of the Internet in the mid-1990s, “Microsoft has missed a lot of industry shifts,” says IDC analyst Al Gillen. Though its deep pockets have often enabled it to catch up through acquisitions, Gillen says that sometimes “they were just too late to the market to … reclaim a big piece.”

Nowhere is this more apparent than in the mobile space. Despite the recent release of Windows Phone 7, Goldman Sachs cited Microsoft’s approach to mobility as one of the main reasons for downgrading its status, describing its woes as “not just a this-year issue.” Joseph Bonner, senior analyst for Argus Research, concurs: “They haven’t gotten that idea of consumer mobility and how you feed that appetite.” And while Microsoft may eventually reclaim some of the mobile market, says Bonner, “I don’t see that erosion stopping.”

Part of the problem is the leadership’s apparent unwillingness to take risks. “Microsoft has become a more conservative company,” says Gillen. Indeed, when confronted with the news that Apple had eclipsed Microsoft in market cap, CEO Steve Ballmer trumpeted the company’s dominance in the PC market as evidence of its stability — which, says Bonner, “illustrates the old way of thinking.” Rather than chasing new innovations, the company believes its traditional business model will keep it safe. But with business users increasingly bringing consumer technology to work — a trend known as “consumerization” — experts say the stranglehold Microsoft currently has on the PC market is in danger of slipping away. “Long-term,” says Gillen, “that’s a very, very big problem.”

None of which is lost on Microsoft employees. According to Gillen, who has followed the company for 20 years, “They realize they’re in a position they really don’t want to be in.” The firm’s significant investment in cloud computing suggests some willingness to try new things, and there’s no denying it remains a dominant player in the industry — and one with no obvious successor. But as Zorovic observes, there are real consequences to the growing frustration among employees. Noting the recent departure of several key executives, he says, “People have been voting with their feet.” Apparently, consumers aren’t the only ones looking for more exciting options elsewhere.